Getting a start-up off the ground can be an arduous task. From securing financing to hiring employees, there are many traps for the unwary. This article summarizes some of top legal mistakes start-ups make and offers advice for how to avoid them.
Failing to execute a written agreement among founders
When starting a new venture, it is imperative to plan for both the best and the worst. A founding shareholders or partnership agreement is the best way to avoid disagreements down the road.
Some of the key issues to decide and reduce to writing include:
- The percentage of ownership assigned to each founder
- The roles, titles and responsibilities of all founders
- Any special plans for funding or uses of proceeds or apportioning of profits
- The procedures for making day-to-day business decisions
- The methods required to resolve disagreements
Selecting the wrong business entity
There are a number of legal structures available to entrepreneurs, all of which have distinct advantages and disadvantages.
While a partnership may involve less paperwork, it does not shield the owners from personal liability for the debts and obligations of the business.
While it may be more costly and complex, a limited liability corporation (LLC) or corporation is generally a safer choice.
Leaving your intellectual property unprotected
When it comes to protecting valuable intellectual property, being proactive pays off. Even at its earliest stages, nearly every start-up has intangible assets worthy of protection, such as the company name, logo and key products.
If you fail to obtain the proper trademarks, patents and copyrights, you may have no legal recourse should a competitor try to use them. In addition, without the proper non-disclosure agreements in place, your business partners or employees could walk out the door with your million-dollar idea.
For particularly valuable intellectual property, it may be advisable to establish a separate entity for the ownership of the “crown jewels” for protecting them against future claims.
Hiring employees can be an exciting step for a new company. However, it is imperative that you understand your legal obligations as an employer.
From tax filings to hiring agreements, there is a lot of paperwork involved. Also, while hiring independent contractors may seem like a great way to avoid many state and federal employment laws, misclassification can lead to significant penalties.
So, it is important to understand the employment and labor rules.
Thinking you can do it on your own
In order to cut costs, many entrepreneurs try to take everything on themselves. This is a bad idea for many reasons.
First, you likely already have too much on your plate. Second, when it comes to accounting and legal issues, mistakes can be disastrous, costing your start-up both time and money in the long run.
The best course of action is to hire.
Dan Brecher comes to Scarinci Hollenbeck after being the head of the Securities and Investment Banking Department of a 250 lawyer Manhattan firm and then running his own boutique securities and investment banking law firm in Manhattan. His experience ranges from general counsel of New York Stock Exchange and NASD/FINRA member brokerage firms to representation of companies in hundreds of public and private securities offerings and advising institutional and high net worth investors. He is the editor to the firm’s blog: www.scarincihollenbeck.com/firm-insights